J.C. Penney is winning the race to become the next Sears

Department store J.C. Penney's third-quarter report answers the question: How much worse could it get? A lot worse, as it turns out. While other department stores are making progress -- Macy's, for instance, put up solid numbers and boosted its guidance earlier this week -- J.C. Penney is not.

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The company's comparable sales tumbled 5.4% in the third quarter, leading to a net loss much bigger than one year ago. J.C. Penney also lowered its full-year guidance for comparable sales to a low-single-digit decline, and it pulled its earnings guidance entirely. J.C. Penney has a new CEO who will attempt to right the ship, but the retailer may now be past the point of no return.

Things are getting worse

J.C. Penney doesn't sell enough stuff. That's the core problem, and the company has struggled mightily to find a solution. "Right-sizing" the company, by closing stores or slashing inventory, isn't going to work. It didn't work for Sears; it just delayed the inevitable.

There aren't very many examples of retailers that suffered the kind of sales declines that J.C. Penney is going through and later recovered. Warren Buffett, talking about Sears in 2005, said: "Turning around a retailer that has been slipping for a long time would be very difficult. Can you think of an example of a retailer that was successfully turned around?"

Best Buy is perhaps the most notable example of a major retailer that successfully turned itself around, but that company took aggressive steps before things got all that bad. Best Buy was still solidly profitable on an operating basis when the turnaround began in 2012, and it remained profitable throughout its turnaround. That can't be said for J.C. Penney.

J.C. Penney posted an adjusted net loss of $164 million in the third quarter, down from a loss of $108 million in the prior-year period. Gross margin dropped to 33.8%, down from 35.6% in the third quarter of 2017. Selling, general, and administrative expenses accounted for 33.3% of revenue, up from 32.7%. Next to nothing is going right.

J.C. Penney still expects to produce positive free cash flow in 2018, but that doesn't mean much for a few reasons:

J.C. Penney includes gains from the sale of operating assets in its free cash flow figure. Selling off assets is not sustainable.

J.C. Penney may be underspending on capital expenditures to preserve cash. Depreciation and amortization totaled $419 million through the first nine months of the year, compared to capital expenditures of just $321 million.

J.C. Penney is reducing its inventory levels, which can create a temporary boost to its cash flow. That can only be done for so long, and empty-looking stores are probably not helping revive the company's image.

Exactly where J.C. Penney's free cash flow ends up for the year depends on how well it does during the holiday season. But there's not much reason to believe the company's fortunes will suddenly turn around in the next six weeks.

J.C. Penney has some time but probably not much

J.C. Penney doesn't have any significant debt maturities until 2023. It can keep selling off assets for a while to stay afloat and hope that its performance improves enough by then to avoid a reckoning. But given that J.C. Penney is doing this badly when the economy and consumer spending are so strong, things could fall apart quickly if a recession hits in the next few years.

Investing in a company that can only survive if the economy remains strong is a recipe for disaster. Given its worsening results, a turnaround for J.C. Penney looks like the longest of long shots.